madfranks
31st October 2012, 04:50 PM
I read some of the news about Hurricane Sandy and in one of them some politician was threatening people who might be tempted to "price gouge" and raise the prices of their goods during this emergency. Now, having a decent background in Austrian economics, I immediately knew this was a bad idea, because not allowing prices to rise when demand rises, feeds bad information to the market, bad information that sometimes results in people dying. For example, take a convenience store owner who has a remaining stock of 25 bags of ice when the storm knocks out power to the whole city. He sees that since the power is out, demand for his ice is going to increase substantially because of the lack of refrigeration. Let's say a bag of ice runs $1.99.
So what happens if he's not allowed to raise his prices? Folks who have some hot dogs and veggies in the fridge they don't want to go bad are going to buy bags of ice to keep their food cold. $1.99 is cheap and they are willing to pay that low amount of money to keep their food cold. Within a half hour this store owner is out of ice after the first 5 or 10 people in line take every last bag of ice he has left. About 10 minutes later a man comes in who has medication that needs to be refrigerated but he's out of luck because the ice is all gone, and not just here, all over the city where the price of ice is now artificially undervalued, and the ice bins have been picked clean all over the city. This person, and all the other people who desperately need ice, are out of luck due to the policy of price fixing during emergencies. Additionally, the convenience store owner sees the huge risk he has to take to keep his store open during the storm and decides that $1.99 for a bag of ice doesn't provide enough profit to justify the risk involved to open and maintain his store during the hurricane, so he closes the store prematurely and nobody gets ice at all. In this scenario, those who casually want the ice get it over those who desperately need it, and the store owner has no incentive to keep his store open for those who may need his supplies.
So what happens if the vendor is allowed to adjust his prices due to supply and demand a.k.a. "price gouging"? Say he raises the price of his ice to $15 per bag in the face of the disaster. The folks who were going to buy ice to keep their hot dogs from spoiling are not going to buy it at that price. It's cheaper to let their food spoil than pay $45 for 3 bags of ice to keep their food cold until the power comes back on. The people who are desperate for ice to keep their medication chilled, while certainly not happy with paying so much, do it anyway because paying the $15 price is preferable to losing their medicine and suffering the complications. Seeing his ice supply dwindle, he raises it to $25, then to $50 as he has the last bag of ice in the neighborhood for sale. With the extra profit margin, he keeps the store open 24 hours because the profit for doing so makes it worth while. He sees that not very many people are willing to pay $50 for a bag of ice until a man comes in at 2am with a wife at home who fell and broke her arm and desperately needs a bag of ice to keep the swelling down. He gladly pays the $50 because he was desperate for ice and the vendor is awarded for braving the elements and keeping his store open. In this instance those who needed the ice the most get it, and the store owner has provided better service to his customers.
Anyway, I didn't mean for this post to be such a rant, but seriously, 99.9999% of people out there think that "price gouging" is a horrible thing that only greedy, selfish, evil people do, and it's such a noble and good thing to fix prices during emergencies so everyone has access to goods and services at the same price as before. These people are ignorant fools who don't realize that by supporting this system they are condemning people to unnecessary suffering and even death.
So what happens if he's not allowed to raise his prices? Folks who have some hot dogs and veggies in the fridge they don't want to go bad are going to buy bags of ice to keep their food cold. $1.99 is cheap and they are willing to pay that low amount of money to keep their food cold. Within a half hour this store owner is out of ice after the first 5 or 10 people in line take every last bag of ice he has left. About 10 minutes later a man comes in who has medication that needs to be refrigerated but he's out of luck because the ice is all gone, and not just here, all over the city where the price of ice is now artificially undervalued, and the ice bins have been picked clean all over the city. This person, and all the other people who desperately need ice, are out of luck due to the policy of price fixing during emergencies. Additionally, the convenience store owner sees the huge risk he has to take to keep his store open during the storm and decides that $1.99 for a bag of ice doesn't provide enough profit to justify the risk involved to open and maintain his store during the hurricane, so he closes the store prematurely and nobody gets ice at all. In this scenario, those who casually want the ice get it over those who desperately need it, and the store owner has no incentive to keep his store open for those who may need his supplies.
So what happens if the vendor is allowed to adjust his prices due to supply and demand a.k.a. "price gouging"? Say he raises the price of his ice to $15 per bag in the face of the disaster. The folks who were going to buy ice to keep their hot dogs from spoiling are not going to buy it at that price. It's cheaper to let their food spoil than pay $45 for 3 bags of ice to keep their food cold until the power comes back on. The people who are desperate for ice to keep their medication chilled, while certainly not happy with paying so much, do it anyway because paying the $15 price is preferable to losing their medicine and suffering the complications. Seeing his ice supply dwindle, he raises it to $25, then to $50 as he has the last bag of ice in the neighborhood for sale. With the extra profit margin, he keeps the store open 24 hours because the profit for doing so makes it worth while. He sees that not very many people are willing to pay $50 for a bag of ice until a man comes in at 2am with a wife at home who fell and broke her arm and desperately needs a bag of ice to keep the swelling down. He gladly pays the $50 because he was desperate for ice and the vendor is awarded for braving the elements and keeping his store open. In this instance those who needed the ice the most get it, and the store owner has provided better service to his customers.
Anyway, I didn't mean for this post to be such a rant, but seriously, 99.9999% of people out there think that "price gouging" is a horrible thing that only greedy, selfish, evil people do, and it's such a noble and good thing to fix prices during emergencies so everyone has access to goods and services at the same price as before. These people are ignorant fools who don't realize that by supporting this system they are condemning people to unnecessary suffering and even death.